Thursday, 29 March 2012

Free Quarter for Administrators Strengthens Case for Monthly Rents

The High Court has made an important ruling this week that potentially lets administrators off the hook for a whole quarter’s rent.

That’s the result of the currently unreported case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration), and there’s a very good summary of the legal issues and the history behind the case on the UKLegalEagle Blog.

In short, the High Court has decided that where a company goes into administration, any unpaid rent which fell due before the appointment of the administrators will be an unsecured claim against the company and not an expense of the administration, even if the administrators continue to use the property.

There’s little chance of a landlord being able to recover an unsecured claim.

So if the rent is paid quarterly and administrators are appointed the day after the quarter day, then no rent is payable as an expense of the administration until the next quarter day – effectively giving the administrators a free quarter’s trading.

Ironically, this case has come about in the aftermath of the decision in Goldacre which established that administrators could no longer calculate rent on a daily basis but rather had to pay for the full quarter. 

There’s more commentary on the Goldacre case too on the UKLegalEagle Blog.

Tenants and administrators will see this as a welcome opportunity to trade a company back into solvency and save jobs, although there will be no flexibility when the next quarter day comes round.

Landlords however are likely to feel cheated; and will think the High Court has just legalised a limited period of commercial squatting.

Perhaps the pre-Goldacre pay-as-you-go approach to rents was the fairest one after all.

The other irony of this situation is that it's likely to strengthen a tenant’s hand if it wants to ask its landlord to accept payment of rent monthly, rather than quarterly, to help cash-flow.

That’s something the British Retail Consortium has been advocating for years, but which the British Property Federation has felt should only be a concession to those in need, rather than healthy businesses trying to exploit an opportunity to change their terms of trade.

Landlords might however feel more inclined to switch to monthly rents now because they risk only losing a month’s rent rather than a whole quarter if the tenant goes into administration.

There's now an incentive for both landlords and tenants to shift towards monthly rather than quarterly rents (see this briefing note from Forsters for further commentary).

The detailed judgment in the Luminar case has now been released, setting out the rationale for the decision and summarising the position on rents in administration generally.

The case hasn’t been reported yet on Bailii, so there’s no link to the judgement yet, but here's a useful explanation from CMS Cameron McKenna.

Where rent becomes due during, rather than before, the period when an liquidator or administrator is retaining the property for the purposes of the liquidation or administration then the whole sum is payable as an expense, even if the liquidator or administrator gives permission to forfeit the lease or vacates the property before the end of the relevant quarter or month to which the advance payment relates.  In other words, a full quarter’s rent is payable where rent is payable on a quarterly basis.  This was the decision in the Goldacre case.

Cameron Mckenna suggest areas for consideration include:

·         amending leases to provide for monthly rents in advance;

·         amending leases to provide for rent to accrue on a daily basis with an “on-account” payment each quarter;

·         amending rent concession letters to ensure that monthly rent concessions amend the lease rent payment dates as an agreed variation;

·         acting swiftly, where appropriate, in seeking the consent of the administrators to forfeit the lease and take control of the property.  Cameron Mckenna comment that this is the only real remedy available (although not guaranteed) to landlords in relation to administrations or liquidations commencing shortly after a quarter day;

·         acting quickly, openly and fairly with the administrators in order to put a landlord in a better position, should an application to the court be required to permit forfeiture of the lease.

So the case for monthly rents seems to have been strengthened, albeit only as a bi-product of this judgment.

Luminar may be appealed.

Many however will agree with Cameron McKenna’s verdict that Parliament should review the fairness of the position in which the law now leaves both landlords and administrators, depending on the timing of the insolvency, and legislate for rent to be paid for the period during which the property is retained for the purposes of the administration or liquidation of the tenant. 

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